1. Field of the Invention
The present invention relates generally to material sourcing, and more particularly to a system and method for automated analysis of sourcing agreements and performance.
2. Description of Related Art
Proper management of material sourcing policies and structuring of material sourcing agreements is a huge challenge to virtually every business. Typically, material costs comprise 30-70% of revenue and drive a business' gross margin. Material costs, inventory, and availability are key sourcing related business performance metrics. Thus, the business must constantly balance costs with inventory and availability. For example, the business may have an option of purchasing a particular material at a relatively low price. However, if the business cannot turn around and sell the material or a by-product of the material relatively quickly, the business is then required to store the material, leading to inventory-related costs and reduced working capital. Alternatively, if the business has reason to believe that future availability of the item is low, and thus will result in an increased price for the material, the high inventory-related costs and reduced capital may be acceptable and more feasible in the long term.
Conventionally, businesses are faced with various sourcing risks including price risk, availability risk, and demand risk. Uncertain or inaccurate forecasts can lead to demand risks, while uncertainty of prices leads to price risk. If demand is high for an item, then the price is generally higher, and the converse is true. However, one cannot predict, with precise certainty, demands of a market. Finally, an uncertainty in supply leads to an availability risk. Supply uncertainty may include capacity shortages, quality problems, supplier allocation decisions, delivery disruptions, technology changes, and termination of production of a material by its supplier. Supply uncertainty is also related to demand and price uncertainty. For example, the higher the demand, the higher the costs and likelihood that availability is lower. All of these sourcing risks define potential profitability of the business.
Accordingly, businesses must structure supply agreements in such a way as to optimize future business performance. However, proper structuring of supply agreements requires a business to identify a range of possible demands, prices, and supply forecast scenarios, and to assign probabilities of likelihood to these scenarios. Generally, a plurality of scenarios should be developed including, for example, base, high, and low scenarios. In this most basic example, the base scenario is a standard forecast, while high and low scenarios capture uncertainty around the base forecast. Any desired number of additional scenarios may be developed for special or unique circumstances which may affect price, demand, and supply of the material. Once these scenarios have been developed, then steps must be taken to reduce sourcing uncertainty and improve economic performance.
One conventional method for reducing sourcing uncertainty is for a business to develop and enter into proper sourcing agreements, and more particularly, structured sourcing agreements. Sourcing agreements refer to any of a broad array of possible sourcing arrangements, ranging from very formal, structured agreements (e.g., legally binding agreements with specific terms and conditions) to very informal, unstructured agreements (e.g., verbal agreements with few if any specific terms and conditions). Structured sourcing agreements are buyer-supplier agreements that include defined prices and/or quantity terms, as well as lead times, payment terms, penalties, and other payments and liabilities. When entering into a structured sourcing agreement, the business must determine a level of commitment to specific (or a range of) prices and quantities. The business must also determine what cost the business is willing to pay for flexibility. Numerous other considerations may be contemplated in order to develop structured sourcing agreements.
Accordingly, the structured sourcing agreement may be a fixed price sourcing agreement, a fixed quantity sourcing agreement, a quantity flexible sourcing agreement where a commitment is made to buy/supply over a defined range, or a sourcing agreement with a combination of these and other terms and conditions, such as delivery lead times and quality and other performance commitments. In order to reduce sourcing uncertainty, the business must create and enter into these sourcing agreements tailored to specific sourcing requirements, circumstances, and objectives, typically, with a portfolio of complementary structured sourcing agreements.
The practical application of scenario development and sourcing performance analysis is highly complex, time consuming, and often difficult to perform. A business is typically not able to factor in various trade-offs between sourcing agreements over time. Furthermore, determining proper utilization of sourcing agreements requires a full understanding of sourcing situations, an evaluation of impact on future business performance, and proper development of sourcing agreement strategies. Therefore, there is a need for a system and method for automated analysis of sourcing agreements and sourcing performance. There is a further need for this system and method to be relatively easy to operate.